McCain said the US should restrict Iran's ability to import petrol, impose financial sanctions on the Bank of Iran, and instigate worldwide visa bans and asset freezes.
And he said if the UN Security Council did not increase political and economic sanctions on Tehran, the US should lead other nations in imposing multilateral sanctions.
Western powers accuse Iran of seeking to obtain nuclear weapons through its nuclear programme; Iran says it is only for peaceful purposes.
Mahmoud Ahmadinejad, the Iranian president, has also caused controversy with anti-Israel remarks, which he reiterated on Monday in a speech in Tehran.
The "criminal and terrorist Zionist regime" would soon "disappear off the geographical scene", local media reported him as saying.
McCain also warned the conference that the Iranian government could pass nuclear weapons on to one of its "allied terrorist networks" - groups such as Hamas and Hezbollah.
"Armed as well with its ballistic missile arsenal, an Iranian nuclear bomb would pose an existential threat to the people of Israel," he said.
McCain criticised Barack Obama, the Democratic presidential hopeful, for offering to hold talks with Iran, calling the proposal a "serious misreading of history.
"Rather than sitting down unconditionally with the Iranian president or supreme leader in the hope we can talk some sense into them, we must create the real-world pressures that will peacefully, effectively change the path they are on," McCain said.
"It's hard to see what such a summit with President [Mahmoud] Ahmadinejad would actually gain, except an earful of anti-Semitic rants and a worldwide audience for a man who denies one Holocaust and talks before frenzied crowds about starting another."
Al Jazeera's Washington correspondent, Rob Reynolds, said McCain's comments at the Aipac conference were an attempt to contrast his more hardline stance on Iran with Obama's stated willingness to meet with Iranian leadership in a bid to woo US Jewish voters who are traditionally overwhelmingly Democrat.
The Obama campaign responded swiftly to the remarks, saying McCain wished to continue the "divisive" policies of George Bush, the US president.
"The United States and Israel cannot afford four more years of an unwillingness to change course," said Hari Sevugan, a spokesman for the Obama campaign.
Both Obama and Hillary Clinton, his Democratic presidential rival, are to speak at the Aipac conference on Wednesday.
Aipac, the most powerful pro-Israel lobby in the US, is formed from dozens of pro-Israel political action committees that draw a large part of their support from the Jewish-American community and provide funding to presidential candidates.
Aipac also draws support from evangelical Christian groups.